Union Pacific 2010 Annual Report Download - page 56

56
Materials and Supplies – Materials and supplies are carried at the lower of average cost or market.
Property and Depreciation – Properties and equipment are carried at cost and are depreciated on a
straight-line basis over their estimated service lives, which are measured in years, except for rail in high-
density traffic corridors (i.e., all rail lines except for those subject to abandonment, yard and switching
tracks, and electronic yards), for which lives are measured in millions of gross tons per mile of track. We
use the group method of depreciation in which all items with similar characteristics, use, and expected life
are grouped together in asset classes, and are depreciated using composite depreciation rates. The
group method of depreciation treats each asset class as a pool of resources, not as singular items. We
determine the estimated service lives of depreciable railroad assets by means of depreciation studies.
Under the group method of depreciation, no gain or loss is recognized when depreciable property is
retired or replaced in the ordinary course of business.
Impairment of Long-lived Assets – We review long-lived assets, including identifiable intangibles, for
impairment when events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows
are less than the carrying value of the long-lived assets, the carrying value is reduced to the estimated
fair value as measured by the discounted cash flows.
Revenue Recognition – We recognize freight revenues as freight moves from origin to destination. The
allocation of revenue between reporting periods is based on the relative transit time in each reporting
period with expenses recognized as incurred. Other revenues, which include revenues earned by our
subsidiaries, revenues from our commuter rail operations, and accessorial revenue, are recognized as
service is performed or contractual obligations are met. Customer incentives, which are primarily provided
for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a
reduction to operating revenues based on actual or projected future customer shipments.
Translation of Foreign Currency – Our portion of the assets and liabilities related to foreign investments
are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenue and
expenses are translated at the average rates of exchange prevailing during the year. Unrealized gains or
losses are reflected within common shareholders’ equity as accumulated other comprehensive income or
loss.
Fair Value Measurements – We use a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The level in the fair value hierarchy within
which the fair value measurement in its entirety falls is determined based on the lowest level input that is
significant to the fair value measurement in its entirety. These levels include:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
We have applied fair value measurements to our pension plan assets and to our interest rate fair value
hedges.
Stock-Based Compensation – We have several stock-based compensation plans under which
employees and non-employee directors receive stock options, nonvested retention shares, and
nonvested stock units. We refer to the nonvested shares and stock units collectively as “retention
awards”. We have elected to issue treasury shares to cover option exercises and stock unit vestings,
while new shares are issued when retention shares are granted.
We measure and recognize compensation expense for all stock-based awards made to employees and
directors, including stock options. Compensation expense is based on the calculated fair value of the
awards as measured at the grant date and is expensed ratably over the service period of the awards
(generally the vesting period). The fair value of retention awards is the closing stock price on the date of
grant, while the fair value of stock options is determined by using the Black-Scholes option pricing model.
Earnings Per Share – Basic earnings per share are calculated on the weighted-average number of
common shares outstanding during each period. Diluted earnings per share include shares issuable upon
exercise of outstanding stock options and stock-based awards where the conversion of such instruments
would be dilutive.